Have you ever had to press garlic for a recipe? Or put together a Swedish bookshelf, purchased from a Swedish superstore? Yes, you have – and you may have succeeded, so long as you had a garlic press, or the bag of special Swedish tools respectively. But what if you don’t? Yikes. An easy part of the job becomes hard; your likelihood of failure increases, substantially.[2]

Practicing law is often the same. Certain tasks are very complicated. Reasoning, analysis, complex drafting, making hard things simpler for busy clients to understand – not easy stuff. But with the correct tools, forms, checklists, and

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August 3, 2015

In a previous post this blog addressed the Supreme Court’s 2011 ruling in Stern v. Marshall.[1] In Stern, the Court held that Article III of the Constitution limited bankruptcy courts from entering final orders on certain state law counterclaims despite such claims being designated as “core” proceedings by statute (now known as Stern Claims).

The Supreme Court left questions of great interest unanswered in Stern, but two emerged quickly: 1) can a bankruptcy court treat a “core” Stern Claim by the same procedures as “non-core” (disputes not significantly related to a bankruptcy case) under 28 U.S.C. Section 157, and thereby carry the dispute through proposed findings of fact and conclusions of law to forward to the district court; and 2) can a bankruptcy court enter a

July 20, 2015

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July 20, 2015

The Supreme Court of the United States recently addressed whether estate professionals could recover fees expended in defending fee applications. Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. _____ (2015). A divided court ruled that the plain language of 11 U.S.C. § 330(a)(1) allowed compensation only for “actual, necessary services rendered[,]” and that to allow fees for defending fee applications would be contrary to the statute and the “American Rule” that each litigant pay her own attorneys’ fees unless a statute or contract provides otherwise. Procedural Background

In 2005, ASARCO, a copper mining, smelting, and refining company, filed for Chapter 11 bankruptcy protection. ASARCO obtained the Bankruptcy Court’s permission to hire two law firms, Baker Botts L.L.P. and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. Among other services, the firms prosecuted fraudulent-transfer claims against ASARCO’s parent company and ultimately obtained a judgment against it worth between $7 and $10 billion.

July 17, 2015

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July 17, 2015

Over the years, the United States Supreme Court has had to interpret ambiguous, imprecise, and otherwise puzzling language in the Bankruptcy Code, including the phrases “claim,” “interest in property,” “ordinary course of business,” “applicable nonbankruptcy law,” “allowed secured claim,” “willful and malicious injury,” “on account of,” “value, as of the effective date of the plan,” “projected disposable income,” “defalcation,” and “retirement funds.” The interpretive principles employed by the Court in interpreting the peculiarities of the Bankruptcy Code were in full view when the Court recently addressed another complex statute that affects millions of Americans each year—the Patient Protection and Affordable Care Act (“PPACA”). Both the majority opinion of Chief Justice Roberts and the dissent of Justice Scalia relied heavily on bankruptcy precedents in

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June 23, 2015

On June 1, 2015, the Supreme Court released its opinion in Bank of America, N.A. v. Caulkett, No. 13-1421, 575 U.S. ____ (2015), in which it held that a Chapter 7 debtor may not void a junior mortgage under Section 506(d) of the Bankruptcy Code merely because the debt owed on a senior mortgage exceeds the present value of the property and the creditor’s claim is secured by a lien and allowed under Section 502. For now, this opinion cuts off a Chapter 7 debtor’s ability to “strip off” an underwater junior lien.

In Caulkett, the debtor had two mortgage liens on his home; Bank of America held the junior lien. The amount owed on the senior mortgage exceeded the value of the home, rendering Bank of America’s junior mortgage fully “underwater,” or with no current economic value. Generally, where the value of a creditor’s interest in its collateral is

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May 21, 2015

In a case of first impression for any district or appellate court, the Court of Appeals for the Ninth Circuit (the “Court”) held that “when an insider guarantor has a bona fide basis to waive his indemnification rights against the debtor in bankruptcy and takes no subsequent actions that would negate the economic impact of that waiver, he is absolved of any preference liability to which he might otherwise have been subjected.” As discussed below, the case provides a list of factors for courts to consider in determining whether an indemnification waiver should be considered valid for purposes of exempting an insider guarantor’s preference liability.

In Stahl v. Simon (In re Adamson Apparel, Inc.), the Court decided whether a personal guarantor of corporate debt may be liable for preferences where that guarantor is an insider of the debtor but validly waived his rights to indemnification against the debtor. The debtor

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May 18, 2015

Within the past year bankruptcy courts and federal courts adjudicating bankruptcy appeals have further developed the law governing claims in bankruptcy which are generally governed by Sections 501 and 502 of Title 11 of the United States Code (the “Bankruptcy Code”) and related Federal Rules of Bankruptcy Procedure. Below is a discussion regarding two distinct cases that discuss the validity and priority of claims in bankruptcy.

Consumer Debt Buyers Beware: Think Before Filing A Proof of Claim

The Eleventh Circuit Court of Appeals held that a Chapter 13 debtor could prosecute an adversary proceeding against a consumer debt buyer for violating the Fair Debt Collections Practices Act (“FDCPA”) based on the creditor filing a proof of claim on debt which was uncollectible under the Alabama statute of limitations. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).

May 11, 2015

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May 11, 2015

In what appears to be a case of first impression, the United States Bankruptcy Court for the Northern District of Illinois has concluded that payments to a master servicer of a commercial mortgage backed securitization (a “CMBS”) could not be avoided as either allegedly constructively fraudulent transfers or as allegedly preferential transfers because the securities contract “safe harbor” under section 546(e) of the Bankruptcy Code precluded such claims. Krol v. Key Bank Nat’l Ass’n. (In re MCK Millenium Centre Parking, LLC), 2015 Bankr. LEXIS 1432 (Bankr. N.D. Ill. Apr. 24, 2015). A Bryan Cave team, led by New York partner Larry Gottesman, represented the defendants.

The background of the decision is straightforward. The chapter 7 trustee of the debtor brought an adversary proceeding against Key Bank (“Key”), as master servicer, and the related CMBS trust, alleging that the debtor had made loan payments on a loan owed by the debtor’s

April 3, 2015

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April 3, 2015

Winter is over; time for spring cleaning. Alas, your authors are so desperate to put off such drudgery that they decided to write about avoidance actions, and form language for notes and security agreements. If you represent lenders, try taking five from the cluttered garage, dust-bunnied closet, or bursting kitchen junk drawer, and read this; you may save your lender client a buck or two.

The Basics: Workout lawyers all agree on certain principles. For instance, fully secured creditors with undisputed claims deserve to be paid. Further, if the collateral value exceeds the amount of the secured creditor’s claim then payment must include interest, costs, and attorneys’ fees, if the loan documents so provide.[1]

The Wrinkle: But add a wrinkle – the kind of wrinkle rarely considered when structuring a loan, in the glorious salad days of the lending relationship. That wrinkle: Upon the obligor’s bankruptcy, what if

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Winter is over; time for spring cleaning. Alas, your authors are so desperate to put off such drudgery that they decided to write about avoidance actions, and form language for notes and security agreements. If you represent lenders, try taking five from the cluttered garage, dust-bunnied closet, or bursting kitchen junk drawer, and read this; you may save your lender client a buck or two.

The Basics: Workout lawyers all agree on certain principles. For instance, fully secured creditors with undisputed claims deserve to be paid. Further, if the collateral value exceeds the amount of the secured creditor’s claim then payment must include interest, costs, and attorneys’ fees, if the loan documents so provide.[1]

The Wrinkle: But add a wrinkle – the kind of wrinkle rarely considered when structuring a loan, in the glorious salad days of the lending relationship. That wrinkle: Upon the obligor’s bankruptcy, what if the obligor, or its bankruptcy trustee, sues the lender to recover a preference or fraudulent transfer to the lender made prior to the bankruptcy?[2] If the lender defeats such an action, then surely the principles listed above would allow the lender to automatically add its defense costs to its claim, and collect those costs from the collateral or the bankruptcy estate. A recent California ruling says “yes” but notes that some less than ideal loan drafting made it a very hard call.[3] It also notes other rulings featuring unhappy lenders left with large, unpaid legal bills despite a failed attempt by a borrower/trustee to claw back monies properly and validly paid to the lender. So read below, tweak your forms on the front end (see suggested language at the end of this missive), and try to avoid this ever happening to your lender client.

The Facts: The obligor, Mac-Go (the “Obligor”) and its affiliates enter into various loans with a bank (the “Lender”). Later, the Obligor enters bankruptcy and a trustee (the “Trustee”) is appointed. The Trustee asserts various avoidance actions against the Lender, alleging that the Obligor previously paid money to the Lender actually owed by other affiliates, the Obligor did not receive value for the loans, the Obligor preferred the Lender over other creditors, and other claims. The Trustee and the Lender litigate for three years. The Trustee loses. And the Lender has spent $350,000 in attorneys’ fees.[4]

The Problem: There are enough funds in the bankruptcy estate to pay secured claims in full, including the Lender. But the problem is the Lender’s loan documents, and the nature of an avoidance action. Here, the Lender’s documents required the Obligor to pay all fees and costs of collection. And all costs and fees incurred by the Lender to enforce the loan. And all costs, expenses, and fees to enforce the Lender’s collateral and lien rights. Indeed, one loan document stated that enforcement costs included fees and legal expenses in bankruptcy proceedings.[5] Unfortunately, a Trustee’s suit to recover past payments to the Lender, and the Lender’s efforts to protect prior payments, isn’t really “collection.” Nor is it “enforcement,” as the Lender is trying to keep what it has, instead of an effort by the Lender to get what it doesn’t. And although the Trustee’s avoidance suit took place in a “bankruptcy proceeding,” the Trustee’s suit was not part of the Lender’s “enforcement” of its rights (and the word “enforcement” modified all subsequent phrasing in the loan documents). As such, the Bankruptcy Court struggled with whether the Lender was entitled to add its $350,000 in attorneys’ fees to its claim amount, despite the Lender’s defeat of the Trustee’s avoidance action.

The Ruling: After surveying the case law, including the many cases where attorneys’ fees provisions were not sufficiently broad, the Court ruled in the Lender’s favor. But it was only due to California case law, which (for the most part) does not narrowly construe fee clauses in contracts.[6] And the ruling was despite another Ninth Circuit ruling that a preference suit challenging the creation of a security agreement was not an action regarding the “enforcement” of the security agreement – in that case, the Lender won the suit, but got $0 added to its claim for fees or costs.[7] Indeed, the impartial reader may think the Mac-Go Court was struggling to find a way to rule in the Lender’s favor, despite other cases holding that “enforcement” and “collection” have nothing to do with fighting off an effort to claw back what a lender or other creditor has already received.

The Solution: Revise your form note and security agreement. Make sure the attorneys’ fees provision covers fighting off efforts to reclaim or avoid prior payments. Your authors suggest a provision such as the below; the bolded language may be an unusual thing to add at the start of a lending relationship, but could indeed be helpful on the back end, when debtors or trustees try their worst:

Borrower agrees to pay, upon demand, all of Lender’s costs and expenses,[8] including Lenders’ reasonable attorneys’ fees, legal expenses, court costs, and any other costs of any type or kind incurred by Lender: (i) to enforce this Agreement, (ii) to collect any amounts owed to Lender, (iii) in any bankruptcy, insolvency, assignment for the benefit of creditors, receivership, or other similar proceeding relating to Borrower or its assets, (iv) in any actual or threatened suit, action, proceeding, or adversary proceeding (including all appeals) by, against, or in any way involving Lender and Borrower, or in any way arising from this Agreement or Lender’s dealings with Borrower, and (v) to retain any payments or transfers of any kind made to Lender by or on account of this Agreement, including the granting of liens, collateral rights, security interests, or payment protection of any type. Lender may hire or pay someone else to enforce this Agreement or protect Lender’s rights under this Agreement, the costs of which are included in the amounts set forth above and are part of Lender’s right to payment by Borrower.

[8] Revised drafting may be needed if the applicable state law allows the recovery of a set percentage of the loan as “reasonable attorneys’ fees.” See, e.g., O.C.G.A. § 13-1-11(a)(2) (providing that “reasonable attorneys’ fees” in a note automatically means 15% of the first $500 owed and 10% of the amount owed that is greater than $500). But even in that situation, you should make sure the events giving rise to a fee claim include a trustee’s or debtor’s subsequent avoidance action, and not just the more generic “enforcement” or “collection.”

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